China’s monetary policy has come to the fore now that U.S. President Donald Trump has imposed import tariffs on a range of Chinese goods. Many are wondering if China will respond to Trump’s trade war by threatening a currency war. China has enough financial and monetary leverage to bring the U.S. economy to its knees, but having the weapons it needs does not mean that China can afford to use them.

The world has to prepare itself for a new monetary cycle following rising US interest rates.

Labeling China as a currency manipulator is demonstrably baseless, but amid loose talk and wild speculation on this and other issues, a formal summit between U.S. President Trump and China’s President Xi Jinping is both important and urgent.

Since the 2008 global financial crisis, no linkages have been found between the changes in US trade deficits and exchange rates. Chinese exports have grown when global market conditions improve, even in years when the RMB was strong against the dollar.

We often hear that China “manipulates its currency” and harms the U.S. economy. Some say if we punish China as a manipulator or slap tariffs on Chinese goods it would reduce our trade deficit. But what does currency manipulation mean? More importantly, would tariffs on Chinese goods help our economy?

An outflow of capital from China, and the trade deficit it has created for rich countries and especially the United States, has led to an enormous gap in demand. The key route to reducing the trade deficit is a lower value of the dollar, which would require China to decrease its foreign reserves. As negotiations work, this would mean the United States would have to make concessions in other areas of the bilateral relationship.

The Renminbi surprised the world markets by its unexpected devaluations first in August 2015 and then in January 2016. The author argues that the Renminbi is unlikely to devalue abruptly and significantly going forward, even though there may be small fluctuations in the Renminbi exchange rate.

Expectation management is key to the stability of the yuan, and the central bank should give priority to the offshore yuan market, because this is not only a highly free and liberalized market, but also an important venue where international speculators would try to attack or manipulate the exchange rate of the yuan.

Systemic risks like a new round of global currency devaluation and capital outflow could threaten economic stability and growth. In the past two years, the spree of short-term speculative capital and the RMB arbitrage rose and accumulated a lot of risks. A new global monetary management mechanism and a more stable global exchange rate structure are urgently needed.

The lens of government intervention in China has led foreign observers to misinterpret some of the most important developments this year in the foreign exchange market and the stock market.